Retailer of the Year

Connecting With Consumers

April 1, 2006
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Connecting With Consumers
By JILL RIVKIN
Kroger’s market share rises despite intense competition, thanks in big part to its company-wide, customer-centric approach.
Currently serving customers in 44 major markets, Cincinnati-based The Kroger Co. holds the number one or two share positions in 80 percent of those markets, having increased share in 29 of the 44 during 2005. Not surprisingly, the traditional grocer born in 1883 to Barney Kroger today competes with more than 1,100 supercenters, the majority operated by Bentonville, Ark.-based Wal-Mart Stores, whose supercenters have achieved at least a number three share in 28 of Kroger’s markets. Yet despite the intense competition, Kroger reports that its overall market share in these 28 markets increased nearly  40 basis points during 2005.
The competition in the grocery industry has and will continue to heat up, but for PL Buyer’s 2006 Retailer of the Year, the retail mission is clear, and it’s clearly working.
“A popular theme among some investors and the media these days is that traditional supermarket operators like Kroger are being squeezed out of business by price-focused discounters at one endand high-end specialty retailers at the other,” said Kroger Chairman and Chief Executive Officer David B. Dillon, in a recent conference call. “To the contrary, the market share statistics show that Kroger continues to grow in this highly competitive industry environment. We believe these statistics clearly demonstrate that our strategy to better connect with customers is succeeding! Our retail price investments, combined with our service and selling initiatives, led to excellent market share gains in 2005.” 
Having recently released its fourth-quarter and fiscal-year results, Kroger reported 2005 performance that “exceeded our original expectations, including both sales and earnings,” Dillon said. Kroger’s solid fourth quarter generated identical supermarket sales up 6.2 percent with fuel and 4.7 percent without fuel, representing the 10th-consecutive quarter of positive identical supermarket sales, excluding fuel. This growth is Kroger’s highest since the industry-altering Kroger merger with Fred Meyer in 1999. For 2005, identical supermarket sales increased 5.3 percent with fuel and 3.5 percent without fuel, and Kroger increased total sales 7.3 percent, reaching $60.6 billion.
Keeping Up With its Customers
With many of Kroger’s competitors executing price-focused strategies, Kroger has set its sights on the customer — meeting the variant demographics and diverse consumer markets it serves across the 31 states where it does business. Excellent customer service, specialized financial programs, re-merchandised stores featuring added kiosks and services such as postal facilities, dry cleaners, coffee shops and more, plus a solid, well-executed corporate brand program have all played a role in Kroger’s customer-centric approach.
Kroger’s three-tiered — good, better, best — corporate brands program is designed to meet the needs of a number of consumer groups, as the retailer’s stores span the country. The program features FMV — For Maximum Value — a value brand; the company’s banner brands, which represent the majority of the 10,000 corporate brand items and are set to be equal to or better than leading national brands; and the Private Selection premium lineup designed to be upscale, specialty, gourmet-type items.
“This strategy works best for us because it meets the various customer demands that we have within the walls of our stores, regardless of where those stores are located,” says Nick Hahn, Kroger’s director of corporate brands. “We have crafted and designed our brands to meet individual needs. If it’s an FMV item it’s targeted toward the value-oriented shopper. If it’s Private Selection it has premium quality or is very unique and is targeted toward upscale shoppers, and our banner brand, clearly the largest segment of our business, is targeted at our mainstream shopper.”
These corporate brands, with some help from a handful of general merchandise corporate brands, plus the retailer’s natural foods brand Naturally Preferred, represent 24 percent penetration of packaged grocery retail dollars.
“Our penetration has continued to grow over the years, and we believe that as we continue to meet the customers’ wants and needs, it will continue growing,” Hahn says. “We don’t have a specific number in mind, but our success will be determined by our customers, as it is everyday.”
“We’re not determining what we want our corporate brand share to be, our customers are determining it,” adds Don Becker, executive vice president.
Finding the balance between corporate brands and leading national brands is always a challenge, but Kroger execs rely on consumer behavior to dictate the composition at the shelf. “We want to have what the customer wants in national brands and corporate brands,” Becker says.
“We’re putting more focus on merchandising our corporate brand program as an entity unto itself, as opposed to worrying about what the consumer product goods companies are doing,” Hahn says, pointing out his preferred terminology – “consumer product goods” rather than “national brands.” “We think of our product as a national brand, with an extensive merchandising program we put together every year.”
On Your Marks, Get Set
Given the scope of Kroger’s reach across the country, along with changing consumer demands and expectations, setting stores with appropriate merchandising to reach the diverse customer base is critical. And Kroger, like many retailers, has to manage the challenge of merchandising older stores and newer stores equally as effectively, regardless of square footage.
Within Kroger’s stores, much of the focus is on the perimeter because of increased consumer interest in perishables and prepared foods. The deli features many Private Selection meats and cheeses, with increased signage aiming to draw attention to Kroger’s high-end corporate brand program through the deli and drive more traffic to Private Selection center-store items.
“Private Selection has a lot more penetration in our perishables departments,” Hahn says. “We do extremely well in deli meats because Private Selection is a premium-quality product, and we feel very good about what we’ve been able to do with it.”
Part of a remerchandising effort, Kroger has emphasized signage throughout its stores, in particular withthe corporate brands program. Signs with the slogan: “Save on items you buy most,” and round shelf tags with the Kroger guarantee – “Try it, like it, or get the national brand free” – are prevalent throughout stores to generate attention for corporate brands.
The Kroger guarantee is one of a number of elements helping Kroger stay focused on its customer-centric philosophy. About 10 years ago, an 800-number was added to corporate brand products, encouraging customers with questions, concerns or feedback to contact the 24-hour call center located at Kroger’s Cincinnati headquarters. The call center receives about 400,000 calls per-year.
A Healthy Home — Nature’s Market
About 750 to 1,000 stores are home to Nature’s Market, a special in-store department featuring natural and organic items, including Kroger’s corporate brand natural and organic line Naturally Preferred. The Naturally Preferred lineup includes about 225 SKUs from cereal and soy milk to frozen foods, plus 50 SKUs of Naturally Preferred vitamins.
“Today, the average customer is far more concerned about what they’re eating,” Hahn says. “Natural and organic has a healthy connotation so we’re planning on developing more items to make Naturally Preferred a larger segment of our business.”
The Nature’s Market section is being built into all new stores, as consumer interest in natural and organic continues to thrive. Naturally Preferred items also are merchandised throughout many stores where a formal department doesn’t exist yet.
“We’re just on the cusp of this,” Becker says. “We really don’t know how large it can grow, but we know it’s becoming more important. It’s leaving a cult-like group and going mainstream, which is very good for us.”
Becker points out that certain markets are significantly more mature than others – the West Coast more so than the Midwest, for example — with mature markets offering better sales opportunities if Naturally Preferred items are integrated in appropriate aisles.
“I think Naturally Preferred can expand throughout the store,” Hahn adds. “Nature’s Market is a reasonably confined amount of space, and that’s a challenge for retailers going forward as the natural and organic trend continues to expand, and more companies are introducing products.”
Merchandising and promotional work obviously will help boost awareness and sales, both in special sections and throughout stores. A knowledgeable Kroger employee monitors Nature’s Market, offering customer service and guidance while promoting the corporate brand lineup.
“We’re finding out that in many cases the organic items taste really great,” Becker says. “We’re going to push the ‘tastes better’ angle.”
Value is in the Eyeof the Customer
Kroger’s value-oriented lineup called FMV – For Maximum Value – spans the store, with a particularly strong presence in breads and buns, as well as commodity-type items. The line comprises approximately 150 SKUs and has been on Kroger shelves since the Fred Meyer merger in the late 1990s. In the past two years, however, “We have gotten serious about the lineup and competitive pricing,” Hahn says.
 When merchandising FMV, location on the shelf depends upon the category, Hahn says. “When we originally introduced the value line, we typically put it in a corner of the department,” he says. “In recent times, we have moved it. Sometimes, in departments such as salad dressings, it’s on the top. We’ve given it increased presence in certain departments so that our customers can find it. Value lines provide a real value, they’re for anyone that needs it.
“There are value-oriented customers in every one of our stores,” Hahn adds. “It doesn’t make a difference where the store is located.”
FMV gives Kroger an opening-price-point proposition, and provides the fundamentals of corporate brand programs — great value at a great price. And while pricing has its place in the evermore competitive industry, Kroger execs say “price is only part of it.” 
“Price is only a part, and as far as we’re concerned, our plan includes far more than price. It includes our people and certainly includes all of our products at great prices with great service in the stores,” Becker says.
Bill Boehm, senior vice president and president of Kroger’s manufacturing, adds, “If you look at the marketplace, it’s very fragmented in terms of who is succeeding and who is not. And some of the real success stories are not low-price in the food business. It’s about more than price. You’ve got to neutralize on price — you just can’t make it the reason for selecting or avoiding your store.”
Waving the Banner
The Kroger Co. operates more than a dozen banners across the country, with a strong mid-tier corporate brand gracing the shelves of its stores and billboarding the banner brand heavily in center-store aisles. Banner brands are not at all new to Kroger — “We’ve had Kroger brand products since Barney Kroger brought some of the products his mother made at home to his first store,” Hahn says — but they continue to receive serious attention, playing a major role because they account for the majority of the items in the 10,000 products comprising the corporate brand program at Kroger.
“The historical role of private label for decades in the United States was that the retailer looked to consumer product goods items — we don’t call them national brands anymore because we feel we have a national brand — and they were out there copying the best-selling items, putting them in their own brand,” Hahn says. “That was the private label industry in the United States up until nearly 1990, really. Now we are making our products unique. We are making sure our products have unique flavor profiles that our customers like.”
To ensure customer satisfaction — and increase exposure — Hahn says in conjunction with a quarterly banner brands sale, Kroger conducts a nationwide “Dare to Compare” demo, asking consumers to blind taste test Kroger brands against the leading brands. “We did almost three million customer comparisons last year and scored extremely well,” Hahn says. “We want the customer to view our product as equal or better than what is out there. It doesn’t necessarily have to taste just like it.”
Kroger’s corporate brand program encompasses non-food items as well, but this area is not as fully developed quite yet. Traditional grocery stores have been putting more emphasis on non-foods as the supercenter competition increases, and Kroger, too, recognizes room to grow the breadth of its program.
“Heath and beauty is a great opportunity for us going forward,” Hahn says. “Certainly in the corporate brand arena, it has been an area that has taken longer to develop, but the opportunity is there, and we’re going to put emphasis on that.”  
The baby products category features one of Kroger’s nearly two dozen sub-brands, Kroger Comforts. A sub-brand is appropriate in this category, Hahn says, because of consumer expectations, set by the leading brands Huggies, Loves and Pampers. “The category is speaking to what the product provides the user. For us, it would be comfort,” Hahn says. “Everything in this category is projecting a warm feeling, and we want to do that with our product also.”
The baby category is an example where the Kroger Comforts corporate brand has strength enough to be blocked in the merchandising set, a decision that Hahn says is made category by category. “All of our Comforts items are together because we have a very good brand presence and a number of items,” he says. “In other instances, for example dry cereal which has an 80-foot set, we’ll put banner brands to the right of the corresponding consumer product goods item.”
Quality Innovation
“Fundamentally, we believe that product performance sells product,” Boehm says. “It’s not media, not advertising. If you put the quality into the product — both through customer engagement and product performance — the franchise will grow because customers recognize that.”
Kroger manufactures nearly half of its corporate brand food items in its 42 food processing plants, making products ranging from bread, cookies and milk to soda pop, ice cream, peanut butter and coffee.
“With our own manufacturing, we depend a lot on ingredient suppliers,” Boehm says. “In many of these formulated, recipe-type food products, it’s the ingredient suppliers that are often coming up with the real innovation.”
Kroger presses new product development, staying true to its quality mission and customer-focused approach. “We’re increasingly thinking less about the big brands and more about our customers,” Boehm adds. “We step back and say, ‘what is it that engages customers today?’ That’s a pretty fundamentally different approach to new product development than one that says our mission in life is to knock-off the ‘brands.’”
The new product development philosophy and commitment to quality are steadfast within Kroger’s own manufacturing and in its dealings with procured products.
“When we develop a product, whether internally or through a supplier, we hold everyone to the same quality expectations. Everybody plays by the same rules,” Hahn says.
“More than ever, we’re focused on the feedback we get from customers,” Boehm adds. “Everybody gets that feedback, but as an organization, we’re really focused on understanding what customers are saying to us, then responding to it. We measure ourselves in progress along those lines.”
Thanks to its strong manufacturing capabilities — and solid ingredient suppliers — Kroger’s dairy program is very innovative, in particular the ice cream category, which often features items with inclusions and combinations unique to the market.
“The bulk of the dairy section is Kroger brand,” Hahn says. “In virtually every market we have some milk that is from a local dairy, but the bulk of it comes from our own dairies. We do an excellent job with that and the production of yogurt, cottage cheese, sour cream — the entire dairy case.”
Kroger features a “Fresh for Life” campaign to capitalize on some of the dairy industry initiatives, but selling yogurt doesn’t seem to be a challenge these days.
“The yogurt category is growing a lot — we can barely keep this large section stocked,” Hahn says. “When yogurt first came out years ago, it was just plain. Now there are drinks and many innovative flavors.”
In the dairy case, Kroger brand items are prevalent with yogurt, smoothies, a wide variety of cheese, refrigerated dough, butter, gelatin snacks and of course milk. “Dairy is a huge category for us,” Hahn emphasizes.
Other sections of the store see innovation from Kroger manufacturing and partnerships with suppliers. Looking to satisfy time-pressed customers, a Kroger sub-brand called Meals Made Simple was introduced about two years ago. These are fully cooked, refrigerated meal solutions such as pot roast and macaroni and cheese that are ready to eat in four minutes.
“The biggest thing that consumers continue to say is that they don’t have enough time,” Hahn says. “The ready-meals program will continue to address that need with quality products.”
Other areas of innovation derive from diet trends and foodservice trends. In response to the interest in ethnic foods, and in particular Asian foods, Kroger introduced frozen edamame soybeans under its Private Selection brand.
They’re managing it well, but Kroger execs say the speed of change in the industry and with consumer preferences can be challenging.
“The pace is picking up noticeably,” Boehm says. “We’re pretty methodical about the way we do things, and that process has been very successful for us. We take this very seriously, but as the pace of change quickens, companies like us and including us, need to respond and pick up the pace.”
Becker adds, “Our biggest challenge is ourselves. It’s obvious we have a successful company, but moving forward we can’t dwell on the past. We’re going to have to be much more responsive. We can’t limit ourselves, and we have this huge window of opportunity with customers telling us what they want and where they think they’re willing to go with our corporate brands. We need to be quick to respond, we’re a victim of ourown success.”
Progressing With Packaging
As the industry moves at a quick pace and corporate brands gain even more acceptance, like many retailers, Kroger execs scope for growth opportunities. Given the company’s manufacturing capabilities and established program, improvements in packaging and maintaining high quality will get the most attention. “As natural and organic products continue to get bigger, that has great potential,” Hahn says. He adds, “But we’ve been at this for quite some time in the dry grocery section so we have probably as broad an assortment as you’ll find anywhere in the United States.”  
With a solid assortment, packaging gets significant attention given its relevance to consumer decision-making. Individual categories get packaging updates about every four to five years, keeping pace with other brands and category trends. Kroger execs say a major packaging overhaul would be appropriate every six to eight years. “You can’t just put a brand out there and let it get stale,” Hahn says.
Recently, corporate brand packaging was changed to update the corporate logo on banner brands. “The new package gives us more strength by putting our branded corporate logo on it,” Hahn says, estimating completion of about 80 percent of the packaging transition. “We’ll be there by the end of the year,” he says. “You know it would be really nice if you could snap your fingers and all of the old packaging would go away, but the expense of making changes is significant.”  
The coffee category has received a noticeable makeover in recent months, carrying a new look under the corporate banner brand as well as the Private Selection brand, which also features a recently updated logo. The banner brand coffee – manufactured by Kroger – is packaged in a metallic can, making it pop on the shelf and look significantly different than competing brands, Hahn emphasizes.
Sticking with the Consumer
The retail environment changes constantly, with new competitive pressures arising with each acquisition, merger and bankruptcy. Kroger plans to stick to its game plan by staying close to its customers. With more than 120 years of experiencing the industry evolution, The Kroger Co. continues to succeed and set a precedent for traditional grocers and the private label industry. And Kroger executives are optimistic and excited about what the future holds.
“Private label is growing across all retailers,” Hahn says. “It continues to grow at Kroger, and we have a strong tradition that goes back 123 years. We have seen continued growth across virtually all segments of our business, and we plan to continue that growth.”
Boehm adds, “It’s a really exciting time for corporate brands. There’s clearly an evolution in the marketplace with customers’ willingness to try corporate brands, and then, based on quality and performance, stay with corporate brands.”
And Kroger has an advantage over the major consumer-packaged-goods companies, Boehm says. “Corporate brands today open up opportunities that are tough for many of the CPGs to deal with — the big mega trends can be tough for them. Whether it’s healthy eating, organics or the next trend, we can offer a wide cross-section of products in corporate brands that no single CPG can accomplish. In corporate brands, we can offer the entire expanse.”
Kroger execs say they can accomplish the customer-focused initiatives set before them in Kroger’s strategy by staying focused on what they do best — manufacture and market corporate brands in stores, striving for excellence in customer service and satisfaction.
“More and more we are on our own program, our own plan, which is directed at what our customers are telling us,” Becker says. “We’re not looking at the competition, though it’s as competitive, if not more competitive, than it’s ever been. But our plan today is to review our own data, review where we are, and answer to our customers. We’re focused on what the customer wants, and we’ll combine efforts to deliver that.
“This is probably the most exciting time for corporate brands at Kroger,” Becker adds. “Now we are trying to figure out what the customer wants and then respond. It’s our responsibility to deliver what the customer wants.” PLB
At A Glance
The Kroger Co.
Headquarters:
Cincinnati, Ohio
FISCAL 2005 Sales:
$60.6 billion; Food stores account for approximately 95 percent of total sales.
Total store count:
2,507 supermarkets and multi-department stores in 31 states
Store banners:
Supermarkets: Kroger, Ralphs, Dillons, Smith’s, King Soopers, Fry’s, QFC, City Market, Hilander, Owen’s, Jay C, Cala Foods/Bells Markets, Pay Less, Baker’s, GerbesMulti-department stores: Fred Meyer, Smith’s Marketplace, Fry’s Marketplace and Kroger Marketplace.
Price-impact warehouses: Food 4 Less, Foods Co.
Corporate brands:
Three-tiered/good-better-best strategy including FMV, banner brands and Private Selection. Also, Naturally Preferred natural and organic line, plus general merchandise brands Moto Tech, Splash, Bath & Body Therapies, Everyday Living, HD Designs and Office Works.
Corporate brand penetration:
24 percent in the grocery department
Additional formats:
(operated either directly or through its subsidiaries, franchise agreements or operating agreements) 791 convenience stores, 428 fine jewelry stores, 579 supermarket fuel centers, 42 food processing plants
Top executive:
David B. Dillon, chairman and chief executive officer  
Web site:

The Contract Goes To…
“Auctions are not something that private label manufacturers should be afraid of — not at Kroger,” asserts Nick Hahn, director of corporate brands.
Properly used, Hahn says, online auctions are a more efficient way for Kroger to attain information about suppliers, their goods and their pricing. “Frankly, it really hasn’t changed the thought-process of our business,” Hahn says. “What it has changed is that it’s a tool we can use. It’s a method of gathering data from existing and potential suppliers in a more speedy manner than the old tool, which basically was sending letters back and forth.”
Kroger has participated in online auctions for about five years, and company executives maintain that while cost-of-goods is a factor, quality, consistency, service levels, reliability and logistics all play significant roles in their decision-making.
“The guy with the lowest cost at the end of the auction doesn’t necessarily get the business,” Hahn says. “That’s the starting point that provides us with data to evaluate the business.”

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